POINT OF VIEW

It may seem premature to start speculating about Phase Three of the President's wage‐price program when Phase Two has barely begun. However, Phases One and Two are spoken of as temporary periods of sacrifice and restriction leading up to: What?

Plainly Phase Three will depend on the success of Phase Two. If during Phase Two the inflation is successfully controlled and inflationary expectations are laid to rest, then Phase Three can see the demobilization of wage‐price controls. It will hopefully usher in an era of healthy noninflationary growth with prices and wages once more free to follow market forces. This is the carrot.

What about the stick?

If Phase Two fails—and its success or failure could become obvious by next spring —then Phase Three will be an unhappy period of increased controls covering ever more tightly more and more areas of the economy and its capital markets. This is likely because admitted failure for Phase Two would confirm inflationary expectations. If Phase Two were relaxed before it succeeded, it would lead to an inflationary spiral that in time would bring back all the economic distortions of 1969–70 with declining profits and the prospect of rising unemployment.

The contrast between success and failure for Phase Two is appalling. The stakes therefore for our free democracy are high. Our choice: A very tough, unpleasant, sacrificial Phase Two and a return to economic freedom and health in Phase Three or weak, compromising, unconvincing and political Phase Two followed by much more painful restrictions in Phase Three with no end in sight.

The battle against inflation today is primarily an attack on inflation psychology—on the all but universal expectation that prices will continue to rise significantly. The traditional economic causes of inflation do not exist. There are few or no shortages. Demand is flat. There are surpluses of things and surpluses of labor.

Nevertheless, before the freeze the cost of living was rising rapidly and everybody believed that it would continue to rise. The inflation was thus feeding on itself. It persisted chiefly because it was expected to persist. For the United States this is a brand new type of inflation.

During recent years periods of fiscal and monetary restraint succeeded in bringing down demand but failed to bring down inflationary expectations. While the rate of inflation slowed during the recession, it was widely expected to accelerate again as soon as we returned to prosperity.

Now we are turning to a drastic and powerful and painful remedy: price and wage controls. But again they can only succeed if they perform the miracle of ending inflationary expectations — literally ending, not just soothing.

Therefore, we must judge the success of Phase Two not just based on any temporary success it has in holding down the pace of wage and price increases but on its success in convincing people that they will be living in a noninflationary economy. Serious doubts and skepticism will persist for a long, long time. Thus, every effort must be made at the start to convince the community that the new economic program has teeth and political muscle and that our authorities are firm in their determination to succeed.

Alas, early maneuvers in this campaign of psychological warfare have not been auspicious — for example, the recent official statement that the objective of the program was not to eliminate inflation but to bring the rate down to 2 to 3 per cent. Such a willingness to compromise with inflation at such an early date in our attack on it casts doubt on the whole program. If 3 per cent is acceptable, we are likely to have 4 per cent. If 4 per cent is tolerated and the economy prospers, we are likely to get 5 per cent, etc., etc.

It is perfectly true that if the rate of inflation is brought down in a year to 2 to 3 per cent this would be a very favorable accomplishment. But must we promise to stop there? Three per cent is still a high rate of inflation. Why advertise in advance that we will officially end the fight if we achieve a temporary half victory. The worthwhile objective of our effort should be a zero rate of inflation even though our aspiration may turn out to exceed our reach.

Our authorities must first of all realize that they are dealing primarily with a psychological problem of expectations. Their words and their deeds should be expertly planned with this in mind. They must aim to create a climate where future inflation is not universally expected.

If by a miracle that point Is reached, only then can they dismantle the apparatus of controls. The alternatives are grimly unhappy: either depression which would indeed kill inflation in the traditional way or rigid economic growth. Both unhappy alternatives lead to high unemployment. Only success in dealing with inflationary expectations in Phase Two can lead us to the sort of Phase Three which would promise prosperity and full employment.

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